Just got a letter from my former employer to the effect that the pension plan is to be terminated. I will be offered a choice of lump sum or an annuity.
Anyone else have experience with how this stuff works?
In particular how bad does old evil uncle tax man hit you if you take the lump sum?
I don't expect this to be an overly large amount. Probably around 20K. Won't know 'till after June 1.
I'd kind of like to keep the money liquid if I can.
Any advise, insight, thoughts will be appreciated.

I do plan to discuss this with a professional in my State of Ohio. It's just that right now I Know nothing about how these things work.

James

Just got a letter from my former employer to the effect that the pension plan is to be terminated. I will be offered a choice of lump sum or an annuity.
Anyone else have experience with how this stuff works?
In particular how bad does old evil uncle tax man hit you if you take the lump sum?
I don't expect this to be an overly large amount. Probably around 20K. Won't know 'till after June 1.
I'd kind of like to keep the money liquid if I can.
Any advise, insight, thoughts will be appreciated.

I do plan to discuss this with a professional in my State of Ohio. It's just that right now I Know nothing about how these things work.

James
Most folks who do not need the cash roll it over into a self-directed IRA where the funds may be invested any way one chooses. Relatively liquid investments are money market funds, Certificates of Deposit, government bonds. Non-liquid are investments in certain partnerships and trusts.

If you take the cash directly, the government requires a withholding tax.

Yes, you definitely should discuss this with a knowledgeable tax expert, preferrably NOT one who also sells investments. Pay the fee for a one or two hour consult - "free" often has strings attached or the quality may not be good enough for your purpose.

Estate planning:
This would also be a good time to reevaluate your estate planning for your family if you should die.

James,

Unless you absolutely need money to survive, roll over your pension into an IRA. With so many workers switching companies, either voluntarily or not, they never save for retirement. The $20,000 may not sound like much but if you invested it for 20 years it would grow to $50,000 tax free at a 9% rate.

Each time a worker cashes in their pension or IRA when they switch jobs they move a little farther from a comfortable retirement.

Bill Pflanz

I am not a financial planner, nor a wizard at making money, but I believe that if you take money out of your pension before you are of a certain age (59 1/2????) you are going to pay a BIG penalty of at least 25%. And then I believe there are other taxes besides? So, if you don't need the money this moment, it would probably be wise to look into a roll-over. Contact a CPA, or maybe your company can give you some insight?

James,
I've got to second Bill's suggestion of rolling it over to an IRA (if you can afford to) - do it directly without getting a check, or the government will take the "penalty" fee which I remember as being 10% out first. You will have to pay tax on the distribution as ordinary income for the year in which it is disbursed, as well as the 10% fee. I'm not a financial planner, but have "been there" and "had to do that" as far as deciding on disbursements etc. due to "reduction in force".

If you roll it over to a reasonably accessible IRA, you should be able to access the money if needed due to hardship, but may be able to better control the government's getting a large chunk as cash first. Just my $.02 - do talk with someone - if you belong to a credit union, they may offer free/low cost consultation. Remember that many planners earn at least part of their fee from the sales of funds they represent/sell.

The $20,000 may not sound like much but if you invested it for 20 years it would grow to $50,000 tax free at a 9% rate.

You forgot to compound it. It will hit 50k in year 12 and be north of 112k in 20 years.

(1.09)^20 * $20,000 = $112,088 (if compounded yearly)

I think that's right.

You forgot to compound it. It will hit 50k in year 12 and be north of 112k in 20 years.

(1.09)^20 * $20,000 = $112,088 (if compounded yearly)

I think that's right.

Those are nice numbers, of course in 20 years, I'll be 70 years old. (OMG :eek: ) and have been drawing on this money for several years.
Yes I'll have to look at some different instrument since, as most know, I am looking at trying to semi-retire rather soon due to my wife's illness (alzheimers).

I'll let you know what I find out.

James